New York, May 15, 2014 -- Moody's Investors Service has upgraded the ratings on the following notes
issued by Alesco Preferred Funding II. Ltd.:
U.S. $150,000,000 Class A-1 First
Priority Senior Secured Floating Rate Notes due January 2034 (current
balance of $53,385,129), Upgraded to Aa1 (sf);
previously on May 28, 2013 Upgraded to Aa2 (sf)
U.S. $66,000,000 Class A-2 Second
Priority Senior Secured Floating Rate Notes due January 2034, Upgraded
to A1 (sf); previously on May 28, 2013 Upgraded to A2 (sf)
U.S. $64,300,000 Class B-1 Mezzanine
Secured Floating Rate Notes due January 2034 (current balance of $66,945,807,
including deferred interest), Upgraded to Caa3 (sf); previously
on May 28, 2013 Affirmed Ca (sf)
U.S. $40,000,000 Class B-2 Mezzanine
Secured Fixed/Floating Rate Notes due January 2034 (current balance of
$41,645,914, including deferred interest),
Upgraded to Caa3 (sf); previously on May 28, 2013 Affirmed
Ca (sf)
Alesco Preferred Funding II. Ltd., issued in December
2003, is a collateralized debt obligation backed by a portfolio
of bank trust preferred securities (TruPS).
RATINGS RATIONALE
The rating actions are primarily a result of the deleveraging of the Class
A-1 notes, an increase in the transaction's over-collateralization
ratios, and the improvement in the credit quality of the underlying
portfolio since the last rating action in May 2013.
The Class A-1 notes have paid down by approximately 35%
or $28.8 million since May 2013, using principal proceeds
and the diversion of excess interest proceeds. Principal proceeds
resulted from the redemption at par of two assets with a notional of $10
million each (in July and November 2013), and from $5.7
million of unscheduled recoveries from a defaulted asset that were received
between June and November of 2013. The Class A-1 notes'
par coverage has thus improved to 362.7% from 256.2%
since May 2013, by Moody's calculations. Based on the
trustee's April 2014 report, the over-collateralization
ratios of Class A notes and Class B notes are 162.1% and
85.1%, respectively, compared to April 2013
levels of 140.2% and 82.7%, respectively.
The Class A-1 notes will continue to benefit from the diversion
of excess interest, the use of proceeds from redemptions of any
assets in the collateral pool, and unscheduled recoveries on defaulted
assets.
The deal has also benefited from improvement in the credit quality of
the underlying portfolio. According to Moody's calculations,
the weighted average rating factor (WARF) improved to 933, from
1000 in May 2013. The total par amount that Moody's treated
as having defaulted or deferring declined to $34.5 million
from $37.5 million on May 2013. Since the last rating
action, one previously deferring bank with a total par of $3.0
million has resumed making interest payments on its TruPS.
The key model inputs Moody's used in its analysis, such as
par, weighted average rating factor, and weighted average
recovery rate, are based on its methodology and could differ from
the trustee's reported numbers. In its base case, Moody's
analyzed the underlying collateral pool has having a performing par of
$193.6 million, defaulted/deferring par of $34.5
million, a weighted average default probability of 19.10%
(implying a WARF of 933), a Moody's Asset Correlation of 21.74%,
and a weighted average recovery rate upon default of 10.0%.
In addition to the quantitative factors Moody's explicitly models,
qualitative factors are part of rating committee considerations.
Moody's considers the structural protections in the transaction,
the risk of an event of default, recent deal performance under current
market conditions, the legal environment and specific documentation
features. All information available to rating committees,
including macroeconomic forecasts, inputs from other Moody's analytical
groups, market factors, and judgments regarding the nature
and severity of credit stress on the transactions, can influence
the final rating decision.
Methodology Underlying the Rating Action
The principal methodology used in this rating was "Moody's Approach to
Rating TRUP CDOs," published in May 2011. Please see the
Credit Policy page on www.moodys.com for a copy of this
methodology.
Factors that Would Lead to an Upgrade or Downgrade of the Rating:
This transaction is subject to a number of factors and circumstances that
could lead to either an upgrade or downgrade of the ratings, as
described below:
1) Macroeconomic uncertainty: TruPS CDOs performance could be negatively
affected by uncertainty about credit conditions in the general economy.
Moody's has a stable outlook on the US banking sector.
2) Portfolio credit risk: Credit performance of the assets collateralizing
the transaction that is better than Moody's current expectations
could have a positive impact on the transaction's performance.
Conversely, asset credit performance weaker than Moody's current
expectations could have adverse consequences on the transaction's
performance.
3) Deleveraging: One source of uncertainty in this transaction is
whether deleveraging from unscheduled principal proceeds and excess interest
proceeds will continue and at what pace. Note repayments that are
faster than Moody's current expectations could have a positive impact
on the notes' ratings, beginning with the notes with the highest
payment priority.
4) Resumption of interest payments by deferring assets: A number
of banks have resumed making interest payments on their TruPS.
The timing and amount of deferral cures could have significant positive
impact on the transaction's over-collateralization ratios and the
ratings on the notes.
5) Exposure to non-publicly rated assets: The deal contains
a large number of securities whose default probability Moody's assesses
through credit scores derived using RiskCalc™ or credit estimates.
Moody's evaluates the sensitivity of the ratings of the notes to the volatility
of these credit assessments.
6) Recovery of defaulted assets: Fluctuations in the market value
of defaulted assets reported by the trustee and those that Moody's
assumes as defaulted could result in volatility in the deal's OC
levels. Further, the timing of recoveries and whether a manager
decides to work out or sell defaulted assets create additional uncertainty.
Furthermore, realization of higher recoveries from defaulted assets
that were previously removed from the portfolio would positively impact
the rated notes.
Loss and Cash Flow Analysis:
Moody's modeled the transaction's portfolio using CDOROM™
v.2.12.2 to develop the default distribution from
which it derives the Moody's Asset Correlation parameter. Moody's
then used the parameter as an input in a cash flow model using CDOEdge.
CDOROM™ v.2.12.2 is available on www.moodys.com
under Products and Solutions -- Analytical models,
upon receipt of a signed free license agreement.
The portfolio of this CDO contains trust preferred securities issued by
small to medium sized U.S. community that Moody's
does not rate publicly. To evaluate the credit quality of bank
TruPS that do not have public ratings, Moody's uses RiskCalc™,
an econometric model developed by Moody's Analytics, to derive credit
scores. Moody's evaluation of the credit risk of most of the bank
obligors in the pool relies on FDIC Q4-2013 financial data.
In addition to the base case, Moody's conducted a number of sensitivity
analyses of the results to certain key factors driving the ratings.
Moody's analyzed the sensitivity of the model results to changes
in the portfolio WARF (representing an improvement or deterioration in
the credit quality of the collateral pool). Increasing the WARF
by 162 points from the base case of 933 lowers the model-implied
rating on the Class A-1 notes by one notch from the base case result;
decreasing the WARF by 273 points raises the model-implied rating
on the Class A-1 notes by one notch from the base case result.
Moody's also conducted two additional sensitivity analyses, as described
in "Sensitivity Analyses on Deferral Cures and Default Timing for Monitoring
TruPS CDOs," published in August 2012. In the first analysis,
Moody's gave par credit to banks that are deferring interest on their
TruPS but satisfy other credit criteria and thus are highly likely to
resume interest payments; in this case, Moody's gave par credit
to $7.5 million of bank TruPS.
In the second sensitivity analysis, Moody's ran alternative default-timing
profile scenarios to reflect the lower likelihood of a large spike in
defaults. Below is a summary of the impact on all of the rated
notes (in terms of the difference in the number of notches versus the
current model-implied output, in which a positive difference
corresponds to a lower expected loss):
Sensitivity Analysis 1: Par Credit Given to Deferring Banks
Class A-1: -1
Class A-2: 0
Class B-1: +1
Class B-2: +1
Sensitivity Analysis 2: Alternative Default Timing Profile
Class A-1: 0
Class A-2: +1
Class B-1: +1
Class B-2: +1
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions of the disclosure form.
Moody's did not receive or take into account a third-party
assessment on the due diligence performed regarding the underlying assets
or financial instruments related to the monitoring of this transaction
in the past six months.
Moody's describes its loss and cash flow analysis in the section
"Ratings Rationale" of this press release.
As the section on loss and cash flow analysis describes, Moody's
quantitative analysis entails an evaluation of scenarios that stress factors
contributing to sensitivity of ratings and take into account the likelihood
of severe collateral losses or impaired cash flows. Moody's
weights the impact on the rated instruments based on its assumptions of
the likelihood of the events in such scenarios occurring.
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Rachid Ouzidane
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Rodrigo Araya
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's upgrades the ratings of $228.0 million of TruPS CDO notes issued by Alesco Preferred Funding II. Ltd.
